Cash flow definitions and formulas

Cash that actually enters or leaves the business in a period. A sale becomes cash only when it is collected.

Revenue minus all expenses under accrual accounting, recorded when earned or incurred, whether or not cash has moved.

Records revenue when earned and expenses when incurred. It is why profit and cash diverge.

Cash you can reach now: cash on hand plus undrawn committed credit.

Cash generated by running the business. Under the indirect method it starts from net income.

Cash spent on or received from long-term assets and acquisitions.

Cash from or to lenders and owners.

Builds CFO by adjusting net income for non-cash items and working capital changes. Used by most companies.

Lists actual cash receipts and payments by type. The 13-week forecast is a direct method statement.

Non-cash expense that spreads an asset's cost over its life. Added back in the indirect method.

Earnings before interest, taxes, depreciation and amortization. A proxy for operating cash before working capital and capex.

Operating profit before interest and taxes.

Cash spent on long-term assets like trucks, equipment, buildings and software.

Cash left after operating the business and maintaining its asset base.

Cash available to all capital providers before interest. Used in DCF valuation.

Cash left for owners after debt service.

Short-term assets minus short-term liabilities.

The cash tied up in running the business, excluding cash and debt.

Money customers owe you for sales already made.

Money you owe suppliers for goods or services already received.

Average days to collect from customers.

Average days inventory sits before it is sold. Most owners track inventory turns instead; four turns a year is about 91 days.

How many times a year inventory sells through and is replaced. More turns mean less cash sitting on the shelf.

Average days you take to pay suppliers.

Days between paying suppliers and collecting from customers. Every day ties up a day of sales or cost.

Cash invested in the cycle. The precise version values each leg at its own base.

Extra working capital needed to support higher sales.

Current assets relative to current liabilities.

Liquidity without counting inventory.

The strictest liquidity test.

A year of operating cash against short-term obligations.

Share of EBITDA that becomes operating cash.

Whether earnings are turning into cash.

Portion of earnings not backed by cash. High values predict weaker future earnings (Sloan 1996).

Whether reinvestment keeps pace with asset wear.

Cash available to pay scheduled debt. A common lender threshold is 1.20x to 1.25x, though each credit agreement sets its own definition. This page uses the version shown.

Common ABL and term loan covenant. A common lender threshold is 1.0x to 1.1x, often tested only when availability runs low.

Operating profit relative to interest cost.

Debt less cash on hand.

Years of EBITDA needed to repay net debt.

A revolving line of credit you draw and repay as needed, up to a limit.

The collateral-driven cap on an asset-based revolver.

What you can still draw today.

A covenant tested only when availability falls below a trigger, common in ABL facilities.

Net cash consumed per month.

Months until liquidity runs out at the current burn.

A rolling, weekly, direct method forecast of receipts and disbursements for one quarter.

Actual minus forecast for each line, reviewed every week to improve accuracy.

Five-ratio distress model for public manufacturers. Below 1.81 distress, above 2.99 safe (Altman 1968).

Version for private and non-manufacturing firms. Below 1.1 distress, above 2.6 safe (Altman 2000; Altman and Hotchkiss 2006).

Logit model giving a probability of bankruptcy from nine accounting variables (Ohlson 1980).

Standard deviations between asset value and the default point, from the Merton model (Merton 1974; Bharath and Shumway 2008).

Eight-ratio model flagging likely earnings manipulation. Above −1.78 is the common flag (Beneish 1999).

Estimates the probability of default each period using data that changes over time, correcting static model bias (Shumway 2001).

The shortfall in cash flow from plan at a given confidence level, typically via Monte Carlo (Stein et al. 2001).